Shrugs over Drexel, but effects may linger
Outwardly, at least, Wall Street took last week's federal fraud and insider trading suit against the brokerage firm of Drexel Burnham Lambert Inc. with a massive shrug and a ``ho hum.'' Trading levels barely changed, clear indication that large institutional investors had already discounted the government's suit. The $160 billion high yield and go-go junk-bond market maintained its tranquility. And top Drexel Burnham officials insisted their prestigious investment house would eventually be exonerated.
On a deeper, less public level, however, Wall Street was not quite as tranquil about the suit as the market calm would suggest.
The case quickly became the talk of the investment community. A number of major trading deals being handled by Drexel are now somewhat in question, although they are expected to be eventually consummated.
Moreover, Washington's civil suit comes against the backdrop of a trading community that has already seen massive layoffs since last October's market plunge, and concerns that more financial-district employees may be forced from their jobs in light of the sluggish trading patterns this summer.
And most important, there is concern that the Drexel case, however it is resolved, will be one more impediment in the so-far unsuccessful effort to win back small, noninstitutional investors.
``This is just one more incident, like the Boesky case, that causes the individual investor to wonder what kind of a chance he has,'' says Thomas O'Hara, chairman of the National Association of Investors Corporation of Royal Oak, Mich, referring to arbitrageur Ivan Boesky's guilty plea on insider-trading charges. ``It's been known for some time that the Drexel case was coming, so sophisticated investors were not shocked. But for inexperienced investors, there was probably a shock.''
What this case says again, Mr. O'Hara maintains, is that ``all of Wall Street seems to be chasing the big buyers rather than the individual investor.''
Veteran Wall Street analysts, however, were not so sure of the causal impact of the Drexel case.
``Look, at the beginning of this year the Dow Jones industrial average stood at 2,050 points,'' says Larry Wachtel, an analyst with Prudential-Bache Securities Inc. ``As we speak [Friday morning], the market is at 2,051. In eight months, the market has gone up 1 point.''
``The market right now has nothing to do with Drexel Burnham, Boesky, `Wall Street' the movie, or anything like that,'' Mr. Wachtel adds. ``People were traumatized by the crash last October. If there was an opportunity for profit in the market right now, people would be here. People are `risk averse' now. And when the market conditions are right, people will come back, however grudgingly.''
But it seemed evident last week that the market was not about to take off in any dramatic way, for the moment at least. For the week, the Dow industrial average closed up 14.42 points at 2,068.81.
``The market didn't over-react last week, and why should it?'' asks Perrin H. Long, Jr., an analyst with Lipper Analytical Services. ``The average investor does not buy junk bonds.... `Average investors' in the United States constitute around 30 million people, around 15 percent of the population, give or take.
``A lot of `average' Americans probably don't even know that Wall Street is in New York City, if what we're learning about the geographical-orientation of Americans is true. Yes, the Drexel case is another black eye for Wall Street. But the saving grace is that most of us have short memories.... Most of the securities firms that have been around here for many years will continue to be around for many more.''
Long believes that one good thing coming out of the Drexel case is that, ironically enough, many investors will now seek to get to know their brokers on a more personal basis than in the past. ``If the average investor is concerned about the integrity or acumen of his or her broker, the investor is at fault. He or she should be asking, `Do I trust my broker? Can I like him or her?' If the answer is no, if the investor is not comfortable with the broker, they should be finding another person to do business with.''
Retail brokers themselves are now well aware of the changing market climate, says Long, given the recent insider-trading scandals, plus the market doldrums. ``Many brokers are just not calling up their clients with equity ideas now,'' says Long. ``They're afraid that if they press their clients too hard, the clients will take their business somewhere else.''
``There are a lot of very fine men and women out there'' in the financial-services sector, O'Hara says. ``So, in that sense, most individuals probably are not running into anything like what we've been reading about in these insider-trading cases.''
The Drexel case was not the only insider-trading scandal in the news last week. On Wednesday, Stephen Wang Jr., a 24-year old junior stock analyst with Morgan, Stanley & Co., pleaded guilty here to passing along confidential corporate information to a Hong Kong businessman.
US Attorney Rudolph Giuliani said there was ``no evidence of criminal involvement'' by Morgan Stanley. That said, Mr. Giuliani rebuked the investment house for not doing a better job of policing against insider trading.
G.Richard Shell, a professor of legal studies at the Wharton School of the University of Pennsylvania, expects many ``shareholder suits'' against Drexel and other firms linked to insider trading charges.
``This is the classic legal remedy, involving both class-action suits and derivative suits,'' Professor Shell says. ``Shareholders can seek to prove that there have been violations of both state and federal securities laws.''
In other words, says Shell, Drexel's legal woes have barely begun.